Resource nationalism update - EY

May 2015

Mining & Metals

EY key contact

Resource nationalism update

Mineral-rich countries are ensuring that they are extracting sufficient economic rent for the rights of mining companies to exploit their resources. Each month, countries announce increases, or intended increases, in resource revenues via taxes, royalties, beneficiation or state ownership. Yet at the same time, we are now increasingly seeing countries change their laws to encourage mining investment. EY’s monthly update focused on mining and metals summarizes these legislative and taxation changes by country to help you better manage the implications of resource nationalism for your business.

Andy Miller Global Mining & Metals Tax Leader

Recent developments by type of resource nationalism

+1 314 290 1205

Increases in royalties and taxes

[email protected]

Indonesia Government ownership

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization accepts any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, you should seek appropriate advice.

Kyrgyzstan Mining reform Chile (environmental)

DRC (royalties)

Kenya (royalties)

Retreating resource nationalism — return focus to investment attraction China

Panama

Zambia

Import and export restriction Ghana Commodities impacted Bauxite – Ghana

Coal – China, Indonesia

Iron ore – China

Resource nationalism by country Chile Chile is seeing to change its environmental regulations to encourage mining investment. President Michelle Bachelet has appointed a commission, led by the environment minister and including academics and specialists, to create a new environmental regulatory framework within the next nine months. The initiative follows ongoing issues with major mining projects becoming delayed by environmental red tape.1 China China has cut its resource tax on iron ore by 40% to support the domestic industry against cheap and high quality imports. Around 75% of Chinese iron ore miners are running on negative margins at current price levels. The updated resource tax, which came into effect May 1 2015, equates to a tax cut of less than US$1 a tonne for local iron ore miners.2 China’s Ministry of Finance is also considering reducing the VAT for coal, from 17% to 13%. This would also be a support mechanism for domestic miners allowing them to further cut prices. McCloskey coal estimates Chinese miners would gain RMB12.4/t ($2.02/t) with the cut. While both domestic coal and imports would be impacted by the change, the advantage is that domestic miners will be able to reduce their costs whereas imports would need to adjust to local market prices.3 Separately, China is also removing restrictions on investment by foreign companies in copper, aluminium, lead and zinc smelting. The changes came into effect from 10 April 2015 but restrictions will remain on the smelting of tungsten, molybdenum, tin, antimony and rare earths.4 Other restrictions to be removed are export taxes on rare earths, ferroalloys, tungsten, molybdenum and indium from May 1, 2015. In addition, taxes on exports of non-alloyed and alloyed aluminium rods and bars are also to be removed. Eliminating the tariffs is part of a more general streamlining process designed to reduce red tape.5 Democratic Republic of Congo The Prime Minister of the Democratic Republic of Congo is looking to review the country’s draft mining code in consultation with mining-sector representatives before it is decided on by parliament. The new code proposes royalty increases from 2% to 3.5% for precious metals including cobalt and copper and on precious gems to increase from 4% to 6%. The profit tax will

increase by 5% to 35%, and government share in projects will double to 10%. Those holding current exploration contracts will be protected from these changes by a 10-year stabilization clause.6 Ghana Ghana is planning to introduce laws to force the beneficiation of bauxite to a minimum of alumina before export. The policy is part of Ghana’s Ministry of Lands and Natural Resources efforts to add value to the country’s natural resources. The move is likely influenced by a 10% earnings slump from mineral exports in 2014.7 Indonesia Indonesia has plans to roughly double coal royalties next month, in a move which will impact smaller companies with low grade coal. Royalties are expected to be increased in May 2015 despite the current price slump. The mine ministry in Indonesia says it has taken into account that the increase will result in job losses most likely in Kalimantan. At the same time, the Government is tightening coal port rules in an effort to stop illegal mining; and is considering limiting coal exports to 14 ports throughout the country. In 2014 it is estimated that 75mt of coal worth $2.5b was illegally exported.8 Kenya Kenya is moving to enact a progressive mining law before June 30 to provide greater stability to foreign investors and thus hopefully boost investment. Royalty rates, ranging from 1-12% of the gross sales value of minerals, will be implemented as part of the law. Gypsum and limestone get 1% royalty rate, while coal, niobium, titanium, and rare earth minerals 10%, and diamonds 12%.The law also clarifies how revenue from royalty payments will be expended. Communities where miners are operating will receive 10% of the income, 20% to county governments and 70 % to the national government.9 Kyrgyzstan The Kyrgyzstan Government has announced it no longer intends to nationalize Centerra Gold's Kumtor mine, but does want stronger representation on the company’s board. Following pressure to agree to a joint venture or nationalization of the mine, the Kyrgyzstan prime minister has recently said a 50/50 joint venture with Centerra is not in the country's interests. The

6 1

"Chile eyes new environment rules to spur investment", Reuters News, 16 April 2015. 2

China to halve taxes for its local iron ore miners, The Sydney Morning Herald, April 9, 2015 3

"Risks mount for imports into China", McCloskey Coal Report, 17 April 2015.

4

“China removes restrictions on foreign investment in base metals smelting”, Metal Bulletin News Alert Service, 18 March 2015. 5

“China will remove exports taxes on rare earths, aluminium rods and bars on May 1”, The Business Times, 24 April 2015; “China ends export tax on rare earths and other metals”, The Financial Times, 23 April 2015.

"Renewed consultations with mining firms increase likelihood of compromise agreement before DRC's draft mining code becomes law", IHS Global Insight Daily Analysis, 22 April 2015. 7

“Ghana's gold earnings dip 10 pct in 2014 PNA”, (Philippines News Agency), 14 April 2015; “Policy to add value to bauxite before export”, Ghana News Agency, 14 April 2015. 8

“Indonesia coal royalty hike to cost jobs, increase illegal mining -industry group”, Reuters News, 14 April 2015.Indonesia coal royalty hike to cost jobs, increase illegal mining -industry group”, Reuters News, 14 April 2015. 9

"New Mining Law in Kenya Set to Attract Foreign Investors", International Business Times, 11 April 2015.

Resource nationalism update — May 2015 -

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Kyrgyzstan Government currently has a 32.7% stake in the Centerra gold mine.10 Panama Panama is reviewing a reform of its mining laws to increase foreign investment. Changes to regulation would include a review of the institutional and environmental framework that oversees mining activities. However with most mining reserves in Panama located on indigenous land, the review means a certain increased risk of protests by indigenous groups.11 Zambia Zambia is returning to a 9% royalty rate for both underground and open-pit operations, and the corporate income tax rate of 30% for mining and 35% for mineral processing. A 15% variable profit tax on income earned from mining operations, when taxable income exceeds 8% of gross sales, has also been proposed. The amendments are to be reviewed when the Parliament resumes in June and should come into effect on July 1 2015. Royalties were increased at the start of the year from 6% to 20% for open pit mines, and from 6% to 8% for underground mines which saw threats of mine closures and job losses as a result of the current challenging environment.12

10

"Kyrgyzstan aborts plans to grab Centerra’s Kumtor mine, but wants more say", Mining.com, 17 April 2015. 11

"Panama's mining reform likely to lead to increasing indigenous protests and roadblocks disrupting cargo and transport", IHS Global Insight Daily Analysis, 3 April 2015. 12

"Zambia sets mining royalties at 9% – presidency source", Reuters News, 14 April 2015; “Zambia Said to Revert to 30% Profit Tax for Mining Companies”, Bloomberg.com, 14 April 2015; "Zambia seeks to appease mining sector with royalty revision but caution likely to remain until 2016 election", IHS Global Insight Daily Analysis, 22 April 2015.

Resource nationalism update — May 2015 -

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EY’s Global Mining & Metals Center With a volatile outlook for mining and metals, the global mining and metals sector is focused on margin and productivity improvements, while poised for value-based growth opportunities as they arise. The sector also faces the increased challenges of maintaining its social license to operate, balancing its talent requirements, effectively managing its capital projects and engaging with government around revenue expectations. EY’s Global Mining & Metals Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow by developing solutions to meet these challenges. It brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector. Ultimately it enables us to help you meet your goals and compete more effectively.

Oceania Scott Grimley Tel: +61 3 9655 2509 [email protected] China and Mongolia Peter Markey Tel: +86 21 2228 2616 [email protected] Japan Andrew Cowell Tel: +81 3 3503 3435 [email protected] Africa Wickus Botha Tel: +27 11 772 3386 [email protected] Commonwealth of Independent States Evgeni Khrustalev Tel: +7 495 648 9624 [email protected] France, Luxemburg, Maghreb, MENA Christian Mion Tel: +33 1 46 93 65 47 [email protected] India Anjani Agrawal Tel: +91 22 6192 0150 [email protected] United Kingdom & Ireland Lee Downham Tel: +44 20 7951 2178 [email protected]

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Area contacts Global Mining & Metals Leader Mike Elliott Tel: +61 2 9248 4588 [email protected]

EY | Assurance | Tax | Transactions | Advisory

United States Andy Miller Tel: +1 314 290 1205 [email protected] Canada Bruce Sprague Tel: +1 604 891 8415 [email protected] Brazil Carlos Assis Tel: +55 21 3263 7212 [email protected] Chile Lachlan Haynes Tel: + 562 2676 1886 [email protected]

Service line contacts Global Advisory Leader Paul Mitchell Tel: +61 2 9248 5110 [email protected] Global Assurance Leader Alexei Ivanov Tel: +7 495 228 3661 [email protected] Global IFRS Leader Tracey Waring Tel: +61 3 9288 8638 [email protected] Global Tax Leader Andy Miller Tel: +1 314 290 1205 [email protected] Global Transactions Leader Lee Downham Tel: +44 20 7951 2178 [email protected]

EYG no. ER0241 CSG/GSC2014/1434398 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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